Income chargeable: overview
Income within a rental business
The concept of profits from a rental business is broad. A taxpayer should:
- bring in all rents and similar receipts from the exploitation of land or property in the UK, and
- deduct the business expenses incurred in earning the income but not capital expenditure (PIM2000 onwards).
Some capital expenditure is relieved separately (PIM3000 onwards).
Income from properties owned outside the UK, described as overseas property income, is taxed as foreign income. But, generally, the computational rules are the same (PIM4700 onwards).
Most rental business receipts from UK properties will normally consist of rents from the tenants or licensees of land and property. Note that:
- Rental income from furnished, unfurnished, commercial and domestic premises, and from any bare land, is taxable as property income.
- When property is let furnished, any separate sums obtained from the tenant for the use of the furniture etc are rental business receipts - PIM1058.
- Less common receipts from land (such as income from fishing rights) are taxable as property income, see below.
- Taxable receipts include both money payments (for example, cash) and payments in kind.
Receipts other than rents can also form part of the rental business income. Some of the main categories are:
- rent charges, ground rents and feu duties - PIM1054,
- premiums and other similar lump sums received on the grant of certain leases - PIM1200 onwards,
- reverse premiums - see ITTOIA05/S311 and BIM41050,
- income arising from the grant of sporting rights, such as fishing and shooting permits - PIM1060,
- income arising from allowing waste to be buried or stored on land - PIM1052,
- income from letting others use land - for example, where a film crew pays to film inside a house or on land,
- grants received from local authorities or others contributing towards revenue expenses, such as repairs to a property which are deductible in computing rental business income; ‘revenue’ expenses are, broadly, running costs as opposed to capital costs - PIM1056,
- rental income received through enterprise zone trust schemes,
- income from caravans or houseboats where these are not moved around various locations; (but see ESC/B29 and ITTOIA05/S20),
- service charges received from tenants in respect of certain services ancillary to the occupation of property - PIM4300,
- refunds or rebates of rental business expenses which have been allowed for tax,
- deposits/bonds taken from tenants - see final paragraph below,
- insurance recoveries under policies providing cover against non-payment of rent - PIM1056.
Income that is excluded from being in the rental business is listed at PIM1112.
Single transactions are treated as arising in a business
Rents or other receipts arising from a single transaction for the exploitation of rights over UK land are treated as if they arose in a rental business. Therefore the property income charge extends to one-off or casual lettings that may not have the degree of organisation normally associated with a business.
Rental receipts are not usually trade receipts
Various court cases have established the principle that income derived from rights of property in UK land is very unlikely to be trading income except in a hotel or guesthouse activity, where the whole income from guests is usually chargeable as trading income. The mere fact that the taxpayer spends a lot of time working in their letting business - perhaps even all their working time - does not convert rental income into trading income, PIM4300 has more details. (Salisbury House Estates Ltd v Fry  15TC266, Griffiths v Jackson  56TC583.)
The current property income rules compute the income of a rental business, broadly, as though it were a trade. But the established distinction between exploiting the rights of ownership of land to generate investment income and carrying on a trade remains.
For two special cases of furnished lettings see:
- Rent-a-room (letting a room in your own home) - PIM4000 onwards,
- Furnished holiday letting - PIM4100 onwards.
Definition of receipts
Receipts of a property business include:
- payments in respect of a licence to occupy or otherwise use land,
- payments in respect of the exercise of any other right over land, and
- rentcharges and other annual payments reserved in respect of, or charged on or issuing out of, land, see PIM1054 for more details.
Deposits/bonds taken from tenants
Deposits paid by tenants or licensees to landlords will, ordinarily, be receipts of a rental business. Deposits should be recognised in accordance with generally accepted accounting practice, normally by being deferred and matched with the costs of providing the services or carrying out repairs. To the extent that a deposit taken from a tenant or licensee exceeds the relevant costs, and is subsequently refunded, you may accept that it should be excluded from the receipts of the rental business.
Deposits etc. not refunded at the end of a tenancy should be included as income at that point to the extent that they have not already been recognised.